According to wikipedia, a conflict of interest is a set of circumstances that creates a risk that professional judgement or actions regarding a primary interest will be unduly influenced by a secondary interest. Take for example an elected official. His primary interest is to serve the public but he also wants to be wealthy and get reelected. These are secondary interests. There may be conflicts of interest when the elected official’s primary interests are influenced by his secondary interests. Such a situation may occur if a corporation is going to be influenced by a law supported by the elected official and if the corporation offers to pay for the elected official’s campaign. In that case the politician has a conflict of interest between his duty to the public and his desire to get reelected.
The existence of a conflict of interest doesn’t involve any wrongdoing. Just because the politician is in a situation where he is facing conflicting motivations doesn’t mean he is doing anything illegal. What’s reprehensible would be for him to change one of his decisions based on his secondary interest. For this reason, corporations often encourage people to disclaim potential conflicts of interest. This way the organization can manage the risk.
Conflicts of interest can be prevented. The company can remove the person experiencing the conflict of interest of any decisions affecting the third-party involved. The company can simply decide to apply greater scrutiny. Deals involving the person experiencing the conflict of interest and the third party will be watched closely.